In contemplating the accession of the Russian Federation (RF) to the WTO1, a dramatic increase in foreign investment activity (in addition to the remarkable increase that has already occurred2) is anticipated. With respect to this positive tendency, the legislative regulation of foreign investments, especially issues regarding the legal regime applied to direct foreign investments, is becoming more important.
The core legislation governing the national regime of foreign investments in Russia is presented in the Federal Law “On Foreign Investments in the Russian Federation” (hereinafter – the “Law on foreign investments”)3.
It is generally recognized that the main legal guarantees, protection of investments and conditions of commercial activities for foreign investors in Russia provided by the Law on foreign investments, other laws, regulations and international treaties of the RF correspond to international standards.
Due to the on-going process of administrative reform and the liberalization of legislation regarding currency regulation and currency control, as well as due to the recent changes in antimonopoly law, the implementation of direct foreign investments in the RF has become significantly easier.
Direct Foreign Investments: Legal Notion and Forms
Pursuant to the Law on foreign investments, direct foreign investment is considered to be the performance of any of the following actions by a foreign investor:
►Acquisition of no less than 10 percent of the share capital of an already existing or newly established commercial organization
►Contribution of capital into the assets of a foreign legal entity’s branch to be established in the RF
►Performance of a lessor’s functions under the financial lease (leasing) of specific equipment in the RF, whose customs value is no less than 1 million rubles (approximately $38,000).
With respect to the recent changes in Russian antimonopoly and currency regulations it appears practically preferable to focus on the most critical aspects of the regulation of the acquisition of no less than 10 percent of the shared capital of a commercial organization as the most common form of direct foreign investment in the RF.
According to the current Russian legislation, the following foreign investors (entities and individuals) may carry out direct foreign investments:
►A foreign legal entity incorporated in any legal form and entitled to invest in the RF in accordance with the laws of the country of its residence
►A foreign organization (not incorporated as a legal entity) established in any legal form and entitled to invest in the RF in accordance with the laws of the country of its residence
►Foreign citizens entitled to invest in the RF in accordance with the laws of the country of their residence
►Stateless persons, permanently resident in and entitled to invest in the RF in accordance with the laws of the country of their residence
►International organizations, entitled to invest in the RF under the Russian international treaty
►Foreign governments, entitled to invest in the RF under the current legislative regulations.
Main Legal Guarantees with Respect to Direct Foreign Investments
The Law on foreign investments provides for the application of the national regime to foreign investors (in other words – equal rights in the domestic market)4, guarantees the protection of property ownership rights, ensures the fair settlement of disputes, and amongst other guarantees contains a “grandfather clause.”
Concerning direct foreign investments, the “grandfather clause” ensures state protection against increases in mandatory payments for a commercial organization with the participation of foreign investments (hereinafter – the “Commercial organization”) in either of the following cases:
•If a foreign investor has a participation stake of over 25 percent in the share capital of the Commercial organization
•If the Commercial organization performs a specific priority investment project.
Another important safeguard for foreign investors is the possibility of repatriating revenues and income.
Currency Regulation and Currency Control of Direct Foreign Investment Transactions
With respect to direct foreign investments, it should be noted that significant amendments have been made in the currency control regulations governing foreign economic operations. Due to the liberalization of currency regulation (through a series of amendments to the Federal Law “On Currency Regulation and Currency Control”)5, the procedure for currency control in the RF has been greatly simplified.
In accordance with a new version of the Federal Law “On Currency Regulation and Currency Control,” currency transactions between residents and/or non-residents by the acquisition of rights to participate in the share capital of already existing or newly established commercial organizations, do not need to be completed either via special accounts or through the mandatory reservation of funds.
New Antimonopoly regulation of direct foreign investment transactions6
Recent changes in antimonopoly regulation7 also relate to the process of acquiring rights to participate in the share capital of a Russian commercial organization. With respect to the legal regime of direct foreign investments, it should be noted that threshold values for the purposes of antimonopoly control procedures have been increased, and the procedures, as such, have become clearer. It appears reasonable to look briefly through the specific provisions, which are practically important and relevant to direct foreign investments in the form of acquisition of the share capital of a Russian commercial organization.
According to the current Law “On Protection of Competition” the process of acquisition of rights to participate in the share capital of a Russian commercial organization in certain cases, including the cases of the participation of foreign investors, may be subject to:
►the prior consent of the Federal Antimonopoly Service
►the subsequent notification of the Federal Antimonopoly Service.
Obtaining prior consent might be required for establishment of a commercial organization, merger and takeover of commercial organizations8 and transactions in relation to the shares of commercial organizations9. For the purposes of this antimonopoly control procedure the legislation has increased a threshold value of the aggregate booked value of the assets, stipulating it should be more than 3 billion rubles (approximately $114 million) for the participating commercial organizations and has introduced a new threshold value of their aggregate income for the previous calendar year, which should be more than 6 billion rubles (approximately $229 million). At the same time, as a new additional condition by transactions in relation to the shares of commercial organizations, the provided booked value of the assets of a target organization should be greater than 150 million rubles (approximately $5.7 million).
Please note that any of the interested parties of the relevant transaction may act as an applicant for obtaining prior consent.
The subsequent notification might be required for the establishment of a commercial organization as a result of a merger or takeover of commercial organizations and acquisition of shares of commercial organizations10. For the purposes of this antimonopoly control procedure, the threshold value of the aggregate book value of the participating commercial organizations’ assets was significantly increased and should now be greater than 200 million rubles (approximately $7.6 million). Their aggregate income for the previous calendar year should be greater than 200 million rubles. It should also be noted that by acquisition of shares of commercial organizations, it is additionally provided that at the same time the book value of the assets of a target organization should be greater than 30 million rubles (approximately $1.1 million).
Subsequent notification should be filed with the Federal Antimonopoly Service within 45 days after the completion of the transaction by any of the persons listed below:
►the newly established organization (upon the merger of commercial organizations)
►the surviving organization (in the event of a takeover of commercial organizations)
►the purchaser (upon acquisition of shares in commercial organizations).
Please, note that the described provisions for subsequent notification are not applicable to the transactions with the participation of foreign investors, which are subject to the prior consent of the Federal Antimonopoly Service.
Restrictions on Direct Foreign Investments: Current Provisions and a New Regulation
Pursuant to the Law on foreign investments, direct foreign investments in the RF may be made in any assets or sector of the economy, as long as it is not prohibited in the legislation.
The RF has retained the right to make exemptions from the application of the national regime in such activities as banking, production of fissionable materials and related products, ownership rights on agricultural land plots, use of natural resources, etc.
Russia maintains restrictions on direct foreign investments in strategic sectors of the economy (such as foreign trade with defense products).
In certain industries, such as banking and insurance, there are restrictive provisions, which limit direct foreign investments to specific levels regarding their proportion to the amount of Russian entities acting in the particular sector11.
In specific industries, such as broadcasting, gas supply and others, the current legislation limits direct foreign investments to their proportion of the share capital of Russian entities. For example, the participation of foreign investors in the share capital of Russian aviation companies is subject to a 25 percent limit. Exception from this limitation may be obtained upon the decision of the president of the RF.
The Russian government is currently considering a new regulation on the procedure of direct foreign investments concerning commercial organizations of strategic importance for the national safety of the RF. It appears that the list of strategic activities will be actively extended.
Summarizing the effective legislative provisions, which constitute the legal regime of direct foreign investments in the RF with respect to the recent changes in the currency, and antimonopoly laws, it should be noted that they ensure that Russia aims at offering a favorable investment climate, to provide the main guarantees and to open attractive opportunities for foreign investors.
 The WTO negotiations have recently entered the final stage.
 According to a summary of the Federal State Statistics Service, foreign direct investment in Russia amounted to $6.4 billion in the first half of 2006, which is 43.6 percent higher than in 2005.
 Adopted on July 9, 1999 and consequently amended in 2002, 2003, 2005 and in 2006.
 However, the regime granted to foreign investors may not be less favorable than the regime granted to Russian investors.
 Adopted on December 10, 2003 and consequently amended in 2003, 2004, 2005 and in 2006.
 This section contains brief reviews of certain forms of state antimonopoly control (except for details related to financial organizations), which are also applicable to the transactions with the participation of foreign investors.
 The Federal Law “On Protection of Competition” came into force on October 26, 2006.
 For more details, please, refer to Article 27 of the Law “On Protection of Competition”.
 For more details, please, refer to Article 28 of the Law “On Protection of Competition”.
 For more details, please, refer to Article 30 of the Law “On Protection of competition”.
 So-called quotation for foreign investments.